Gold: China’s Rise Will Push Old Yeller Higher, Says Citi

By Mark Gongloff

Everett

Gold has already passed Pluto on its shining path to the stars, and Citigroup’s global commodities strategists believe it has much further to go. Because of China.

Gold “took its cue” from very high inflation and negative real interest rates in the 1970s, but through the credit crisis it has primarily taken its cue from excessive money supply growth, even if that monetary injection has not (yet) produced inflation.

Chinese, Indian and Mexican central banks are buying gold – actions not driven by the short-term influences of real US interest rates, but on the excessive supply of dollars since the credit crisis and the future of the US dollar’s role as the world’s reserve currency.

In the first quarter of 2011, 7% of China’s trade was settled in its own currency compared to just 1% a year ago. If the renminbi was to become fully convertible within five years, it might account for 30% of global banking and markets income. China has also been orchestrating currency swaps with Brazil, Russia, India and South Africa.

Short-term drivers, including real interest rate trends and soft jewellery demand, could pull gold down from time to time, but there is agroundswell below which bodes well for gold in the longer-term: 1. the gold mining industry is no longer a significant hedger; 2. many mid-sized central banks have emptied their vaults; 3. central banks like India and China are buyers; and 4. gold likes dollar weakness, and with the Chinese renminbi in the ascendancy, the dollar’s role in global trade is changing fast.

They don’t forecast a future price for gold — it’s at $1530.80 this morning, down about 0.8%, still near its record — but that’s probably beside the point. This is a very long-term trend, they say.

Comments (1 of 1)

don't know if this is the sign to get out of the gold. central banks are buying but is there any stats which show how much is speculative money already invested in these precious metals?? i haven't seen any.
So compared to these central banks, big hedge funds may sell their holdings and mkt overall will see selling. what about that?

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